How our tax system discourages self-reliance
National Post – opinion
January 04, 2008
Two years ago, I was working with Toronto’s Task Force on Modernizing Income Security for Working Age Adults (MISWAA). A small group of us secured a meeting with Mayor David Miller.
The Mayor entered the room in a state of agitation. He had been working with a number of large companies that were prepared to invest time and resources in helping disadvantaged youth get experience, mentoring and training, but he had discovered that parents were asking their sons and daughters to turn down the opportunity. Why? Because each family’s public benefits would be cut off or reduced if they accepted.
Most of the youth that Mayor Miller was talking about lived with their families in rent-geared-to-income public housing. In many cases, the parents received their basic income from Ontario’s principal welfare program, Ontario Works. The families were caught in a tangle of social policies that made them financially worse off if the children took advantage of work-study opportunities.
For example, new forms of student aid, like a corporate bursary, might reduce other sources of aid the children had been receiving. Worse still, the family’s rent would go up because of the new scholarship income, or if the student got a job to help finance their education.
The larger problem is that, while all of our social-benefits programs have understandable rules in isolation, they often interact with each other in ways that work at cross purposes to their stated intent, reducing incentives to become more self-reliant.
When a person receiving social assistance starts to work, each of the benefit programs they participate in begins to take money back. One program might take 50Â¢, another 30Â¢ and another 25Â¢ on each new dollar earned. Then, there are payroll deductions in the form of EI and CPP premiums. Combined with the welfare and subsidy reductions, they can drive the total effective “tax” on a working poor person to more than 100% of their earned dollar. No single government department is accountable for this morass of unintended social policy consequences.
Economists call these reductions, taxes and premiums on the next dollar of earned income a person’s “Marginal Effective Tax Rate,” or METR. METRs represent the combined impact of imposing payroll taxes, reducing benefits and phasing out social security income, based on the money people make from outside sources, such as a job.
Experts often note that these rates are highest among poor people who participate in more than one social service or income-tested program, while trying to improve their circumstances by earning a modest income. In fact, poor working people return relatively more money to the state than more affluent workers, because they have to give up their benefits to work.
In wider society, children often stay in the family household past the age of 18. Many do so while they pursue further education and training. Others stay at home while they get their first full-time job, pay off their student loans and save for their own place. Adulthood is measured by a person’s readiness to be independent of the family, usually after formal education has ended and working income is stable.
This is very different from what happens to children in families receiving social assistance. When they reach 18, they are immediately considered to be adults and often stop receiving benefits as part of the family.
Public housing is provided to families on the basis of a similar definition of adulthood. Once a child turns 18 and moves out, the “rental unit” (the family home) may be deemed too large. The public housing landlord can evict a family if the size of the rental unit does not conform to the “benefit unit” (the family).
These misdirected social policies punish disadvantaged children during the perilous transition from adolescence to adulthood, precisely when they most need support and encouragement. Forcing under-educated 18-year-olds into the working world and out of the family home puts them at risk for homelessness. These policies also limit their choices in a way that can make dishonest behaviour more attractive. They help create what we commonly refer to as an underclass — whereby the next generation is unable to break the cycle of poverty and dependence in which their parents are trapped.
But there are some straightforward solutions. I offer four: – Reduce Marginal Effective Tax Rates for adults with low incomes:
Reducing these rates requires that the authorities responsible for a range of social programs and payroll deductions — such as Ontario Works, public housing, and child care — develop a comprehensive strategy for lowering METRs for people who receive social benefits when they start to work. This should be done immediately. – Stabilize households in transition to greater self-reliance: Authorities responsible for public housing, Ontario Works, child care and student aid should set new standards for adults attempting to achieve greater self-reliance. The standards should be based on an approved plan for the individual or family in transition through work or further education. – Support children in their transition to adulthood through a “Time-out”:
Provincial government ministries should develop a system that enables eligible young adults up to age 24 working under an approved plan to stabilize their income and their family’s income by imposing a four-year moratorium on all charges and subsidy or rent increases that would otherwise result from the student’s receipt of earned income. – Create a new government responsibility centre to promote accountable interactions: A new government responsibility centre created from existing government ministries should be tasked with resolving the multiple barriers that now result from pro-gram overlap and duplication.
These recommendations are ambitious. They call for a broad, inclusive, integrated and coherent initiative involving all levels of government, many internal departments and a number of social agencies. We need to start today.
firstname.lastname@example.org – John Stapleton worked for the Ontario government in the Ministry of Community and Social Services for 28 years in the areas of social assistance policy and operations. He now works as a social policy consultant with governments and NGOs, and is undertaking an innovations fellowship with the Metcalf Foundation on the disincentives faced by multiply-subsidized adults in the Toronto area.
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